PENSION FUNDS: THE NEXT SHOE TO DROP?

CATHERINE AUSTIN FITTS, MARCH 2008 On February 14th, Eliot Spitzer published an editorial in the Washington Post about the federal role in promoting predatory lending:

"When history tells the story of the subprime lending crisis and recounts its devastating effects on the lives of so many innocent homeowners, the Bush administration will not be judged favorably. The tale is still unfolding, but when the dust settles, it will be judged as a willing accomplice to the lenders who went to any lengths in their quest for profits. So willing, in fact, that it used the power of the federal government in an unprecedented assault on state legislatures, as well as on state attorneys general and anyone else on the side of consumers."--

There is, however, something I don't understand about Governor Spitzer's comments. If the large banks and investment banks in New York were engaging in predatory lending practices, New York officials had a much more powerful tool available than the Attorney General enforcement actions that the Bush Administration halted.

New York government agencies could have shifted their deposits from the institutions engaged in predatory lending to institutions with sound lending practices. They could have warned those banks and investment banks engaged in predatory practices that if they did not behave, New York pension funds would sell their stocks, stop buying their mortgage pools and stop generating investment advisory and brokers fees for them and their affiliates. . .

Indeed, if you look at how much money the New York pension funds have lost over the last year in Bear Stearns, Citigroup or other stocks, (let alone compared to how they would have done if they had shifted to activities and assets that have fundamental economic value) you will see that moving out of activities that had a negative total economic return might have been a winning strategy rather than blaming the Bush Administration for not controlling the companies that you, in fact, own.

BLOOMBERG, MAY 1 There are more than 100 public retirement systems in the U.S. managing a combined $2.3 trillion. The amount is $380 billion short of the funds needed to pay pensions over the next 30 years, according to the National Association of State Retirement Administrators in Baton Rouge, Louisiana.

While the systems earned on average 11.9 percent a year from 2003 to 2006, many of the pensions failed to make the contributions required to keep pace with benefits they promised, the Pew Center for the States, a nonprofit public policy research group, said in a December report. New Jersey's seven retirement funds have a combined deficit of $28.3 billion, up 14 percent from last year, according to state actuarial reports.

States also face a $381 billion liability for retiree health care and other benefits they've promised public employees, and have only set aside $11 billion to fund that commitment, according to the Pew report.

"It's politically expedient to go out and borrow money,'' said Robert Smith, president of Austin, Texas-based Sage Advisory Services, which oversees $5 billion in assets. "It's like taking a second mortgage on a house you haven't paid for yet.''. . .

Issuers have little problem finding buyers for the bonds because they typically yield more than Treasuries and are backed by states and cities. . .

Former Republican New Jersey Governor Christine Todd Whitman sold $2.8 billion of the debt to help close a $4.2 billion deficit in the state's pension fund in 1997, the year she ran for re-election. The state later increased benefits by 9 percent for some public employees after market gains closed the gap.

The strategy collapsed when stocks tumbled in 2001 and the economy slipped into a recession. Pension fund returns fell below the interest rate on New Jersey's bonds, and the state, faced with budget deficits, stopped making the annual contributions it needed to keep pace with rising costs. . .

Philadelphia fell into a similar trap when former Mayor Edward Rendell, now Pennsylvania's Democratic governor, sold $1.29 billion in pension bonds in 1999. John Street, a Democrat who succeeded Rendell, failed to make full contributions to the fund as he tried to balance the budget. The city has about 54 percent of the funds it needs to pay pension benefits over the next 30 years, about the same as in 1999 before it sold the bonds.

CATHERINE AUSTIN FITTS QUOTED IN FINANCIAL SENSE, MAY 2008 I suspect that one of the reasons for the Bear Stearns deal, [and] related market manipulations combined with the Paulson Plan was the fear of what was due out in March from the pension funds about their losses on mortgage and structured finance paper as well as financial stocks. Remember, UBS, Merrill, Citigroup. . . These firms package mortgage securities and sell them to investors, with a significant amounts going to pension funds and insurance companies. They traditionally do not hold large amounts of inventory. My guess is their write downs include derivatives and other types of assets. The really big write downs should hit the pension funds. Yet the silence coming from the pension funds since March has been deathly"